A financial blog on investing in stocks, commodities and the gold bull market.

Friday, July 18, 2008

Oils T1 and Golds A wave

Sounds like a 60's psychedelic rock band doesn't it?

Oil appears to be in the beginning stages of correcting the large T1 move out of the 07 lows. You can find all the technical rules on the lower right side of the home page. We should now see oil test the consolidation zone. I see where the media is already labeling this a bubble. Baloney! Bubbles form when the public piles in. Bubbles form when supply swamps demand but price still rises. Neither one of those has happened yet.

All that happened is human emotion got a little carried away and too many people jumped on the energy complex in a market where nothing else was working. Now that bullish sentiment needs to be corrected to set up the next leg of the bull. I suspect this correction will take some time. We're not going to wipe out the extreme bullishness in only a month or two. Oil is probably going to have to trade sideways to down for a year or more. Makes sense as we are now in a rescession and demand destruction is occuring.

The second chart shows Golds 4 wave pattern. We are currently in the A wave that may or may not top out as oil rolls over. I suspect that gold will follow oil down. I also suspect that Gold is going to resist oils pull. It's already happening as the gold:oil ratio is starting to trend in favor of gold. During the first phase of the commodity bull oil outperformed gold. During the second phase gold should significantly outperform oil. So far oil has increased over 1300% and gold about 300%. During the second phase expect gold to fill that gap.

Once Gold's B wave finishes it will be time to get long precious metals in a big way. It will also be time to concentrate on the metals and forget about oil. That's not to say oil won't go higher, it will. Just that the big % gains are now over in the energy markets. The real opportunity now lies in the precious metals sector for years to come.

I'm watching for the first sign the the FED is ready to panic again. Oil breaking is just the out the FED needs to start cutting, which is going to be necessary in order to save the banking system and Bernanke has made it abundantly clear that this is priority #1 and to hell with what happens to the rest of us. Once we smell the cuts are coming it will be time to load up on the metals.

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Technical trading rules

T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

General Trading rules

G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules.G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

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Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.